Amid the chaos in the stockmarkets this week, there was one particular event that reminded me of why it’s always important to use your own judgement and avoid alighting on the latest hot stock along with the crowds.
I’m talking about the most recent profit warning from drinks maker C&C Group. In case you hadn’t already heard of C&C – which seems highly unlikely if you read any investment magazines or columns at all – it makes cider. Not just any cider – it makes Magners cider. ‘What’s so special about that?’ I hear you ask. Well, it seems the main selling point of Magners is that you drink it in a glass with ice. And that’s about it.
It may not sound like much, but this promotional gimmick managed to carry C&C’s share price from a mere e1.7 in October 2004, to a high of over e13 in January of this year, when it was trading on a p/e of more than 40. Breathless analysts and stockpickers spoke of a ‘cider revolution’ and the company’s massive growth potential. Credit Suisse and Deutsche Bank both had price targets of e15. And yet, there’s a glaring flaw in this analysis – the competition. There are virtually no barriers to entry. Sure, if you aren’t already a drinks maker, you’ll have a problem setting up a cider company from scratch. But it’s ludicrously easy for an existing rival brewer, such as Scottish & Newcastle, for example, to enter the market with a competitor product. And that’s exactly what happened – S&N launched Bulmers cider, which immediately started to grab market share. C&C issued its first profit warning at the start of last month, at which point Tim Price warned MoneyWeek readers invested in the stock to sell out of it. It was a good call, though I suspect even Tim would have been a little surprised at how rapidly the first profit warning was followed up by this week’s.
Meanwhile, the boom in oil prices – which set another new record in the US this week, hitting more than $78.40 a barrel – is still attracting sceptical comments. The same fund managers and pundits who’ll happily buy the idea that there’s a nigh-on infinite appetite in the UK for alcoholic apple juice just can’t get their heads around the idea of the commodities supercycle. And yet, as Jody Clarke points out in this week’s cover story, China’s growth is far from over. The country still needs to put in place miles of roads and rail networks. What are all those new cars hitting the roads going to run on? It certainly won’t be apple juice.
After two profit warnings, C&C Group is still trading on a current p/e of around 12. Yet BP is on a p/e of 10.7 and Royal Dutch Shell’s is just nine. If you ever needed proof that big oil is cheap and under-appreciated, I really don’t think you need look any further.
Merryn Somerset Webb is away